A three-judge bench of the Supreme Court of India considered this problem last year in Union of India v. Hardy Exploration & Production (India). On a reference made by a two-judge bench, the Supreme Court was required to (i) settle the cauldron of confusion created by the use of the term ‘venue’ instead of ‘seat’ in the relevant arbitration clause, and (ii) decide whether Indian courts have supervisory jurisdiction to set aside the award under section 34 of the Arbitration & Conciliation Act, 1996 (“Act”).

Through this post, I seek to critique the judgment of the Supreme Court in Hardy and highlight how a simple “uni-directional” clause[1] was effectively rendered to be of no legal consequence.

Factual Background

The dispute before the Supreme Court hinged on the interpretation of an arbitration clause in a production sharing contract entered into between the Government of India (“GoI”) and Hardy Exploration & Production (India) (“HEPI”). The law governing the contract was that of India and the arbitration proceedings were required to be conducted in accordance with the UNCITRAL Model Law. The contentious portion of the arbitration clause provided:

“33.12 The venue of conciliation or arbitration proceedings pursuant to this Article unless the parties otherwise agree, shall be Kuala Lumpur …”

When a dispute between the parties was referred to arbitration, the tribunal conducted its hearings in Kuala Lumpur and passed the award in favour of HEPI.[2] Subsequently, the GoI attempted to challenge and resist the award in India and the United States.

Proceedings before the Delhi High Court

In India, the GoI filed an application to set aside the award under section 34 of the Act before the Delhi High Court in July 2013. Interestingly, the petition was withdrawn by the GoI itself on the ground of lack of proper jurisdiction.[3] However, the GoI subsequently filed a review petition seeking review of the said order, which was dismissed by the High Court.

On appeal, the division bench of the High Court held that the petition to challenge the award under section 34 of the Act would not be maintainable. Despite the lack of an express determination by the parties, the High Court noted that (i) the arbitration proceedings were conducted in Kuala Lumpur and (ii) the award was made and signed in Kuala Lumpur, and held that the seat of arbitration was, in fact, Kuala Lumpur. Importantly, the High Court also reasoned that in the absence of any dispute with respect to the seat, the ‘venue’ would also be the ‘seat’ of arbitration.

Decision of the Supreme Court

Pertinently, the relevant contract was entered into prior to 6 September 2012 and, hence, was required to be interpreted in accordance with the principle of implied exclusion laid down in Bhatia International v. Bulk Trading (2002). In an effective jolt to the international commercial community, the Supreme Court therein had acceded to the exercise of supervisory jurisdiction of Indian courts over arbitration and laid down the principle that Part I of the Act, which includes provisions applicable to domestic seated arbitrations, applies to foreign seated arbitrations as well, unless its application is expressly or impliedly excluded by the parties.

Applying the principle of implied exclusion to the present case, the Supreme Court opined that if an arbitration clause does not explicitly mention the seat and only prescribes the venue, the venue does not ipso facto assume the status of the seat. In such a case, Part I of the Act would be impliedly excluded only if some additional concomitant factor is appended to the choice of venue.

According to the Court, there were no additional factors to indicate that the prescribed venue in article 33.12 of the contract was actually intended to be the seat of arbitration. On this basis, it concluded that the designation of Kuala Lumpur as the venue was bereft of the legal ramifications flowing from a choice of seat.

As the logical next step, the Supreme Court examined whether any determination with respect to the seat was made by the tribunal. For this, it analysed article 20(1) of the Model Law, which deals with “determination” of the place of arbitration (seat) by the tribunal when the parties have failed to do so; and article 31(3) of the Model Law, which mandates that the award shall state the place of arbitration as determined in accordance with article 20(1). The Supreme Court held that the term “determination” in the Model Law refers to a positive act in terms of an adjudication or expression of opinion. In the opinion of the Court, the tribunal did not adjudicate or express any opinion with respect to the seat in its award. Accordingly, it sought to determine the seat itself and ruled in favour of the jurisdiction of the Indian courts to set aside the award.

Analysis

I argue that the holding of the Supreme Court is erroneous in light of the following factors, leading to an inescapable conclusion that Kuala Lumpur was in fact the seat of arbitration:

Parties’ choice of ‘venue’

While the distinction between ‘venue’ and ‘seat’ is recognised in international arbitration, it is also an established position that, in the absence of any contrary indicia, the choice of ‘venue’ can be equated to the parties’ intended arbitral ‘seat’.[4]

This position has been impliedly accepted by the Supreme Court on numerous occasions. For instance, in Videocon Industries v. Union of India(2011), the Supreme Court dealt with a similar arbitration clause in a production sharing contract. Even though the contract used the term ‘venue’, the Court undisputedly understood it to mean a designation of the intended arbitral seat by the parties.

The same has consistently been the approach under English law as well. In Shashoua v. Sharma (2009), Indian law was the governing law of contract and the arbitration clause designated London as the ‘venue’ of arbitration. The English High Court ruled that when there is an express designation of ‘venue’ without any designation of an alternate place as the ‘seat’, and no significant indicative factors to the contrary, the specified venue would inevitably be the seat of arbitration. This is in light of the strong presumption that the parties would intend to have the seat in the same jurisdiction as that of the venue of arbitration.[5]

Recently, the Malaysian Federal Court in GoI v. Petrocon (2016), while dealing with a similar factual matrix, also adopted the approach exemplified by Shashoua v. Sharma. The Court reasoned that when parties explicitly designate a venue and intend it to be different from the seat, it is usually expected that the seat would also be specifically designated.

Applying the same analogy to Hardy, the Supreme Court should have simply construed Kuala Lumpur to be the intended arbitral seat as the only territorial reference was with respect to Kuala Lumpur as the ‘venue’ of arbitration and no alternate place was designated as the ‘seat’. The arbitration clause was undisputedly ‘uni-directional’ due to: (i) the designation of the Model Law as the curial law; (ii) non-incorporation of any institutional arbitration rules designating a default seat; and, (iii) absence of any contrary indications regarding the choice of seat. Nonetheless, the Supreme Court adopted a semantic approach and reached a fallacious conclusion that the parties had failed to designate the ‘seat’ of arbitration.

Determination by the tribunal

Article 20(1) of the Model Law empowers the tribunal to determine the seat when the parties have failed to do so, as a statutory default rule. Only where the tribunal fails to ‘state’, ‘specify’ or ‘identify’ (See Born at p. 2945) the seat in the award as mandated under article 31(3), a court is required to determine the seat of arbitration.[6] Neither the travaux preparatoires of the Model Law, nor the Model Law Commentary stipulate the requirement for a tribunal to expressly determine the seat under article 20(1).

Furthermore, the act of making an award under article 31(3) (which mandatorily requires the tribunal to state the place at which it was made) creates a legal fiction and the stated place is deemed to be the arbitral seat.[7]The travaux preparatoires of the Model Law on article 31(3) goes on to state that the place stated in the award creates an “irrebuttable presumption” of a territorial link between the award and the place of arbitration.

In this case the award expressly stated that it was “Signed in triplicate at Kuala Lumpur on 2nd February, 2013”. However, the Supreme Court somehow inexplicably opined that, in the absence of an express adjudication, merely stating that the award was made and signed in Kuala Lumpur did not provide sufficient evidence for it to be construed as the seat. Thus, the Supreme Court’s decision completely disregards this irrebuttable territorial presumption and settled jurisprudence under Model Law.

It is also worth noting that in Hardy the Supreme Court’s decision as regards the requirement of an overt act of adjudication was devoid of any examination of literature relating to the Model Law in juxtaposition with the generally accepted principles of international arbitration.

Determination of seat by the court

In the event the parties as well as the tribunal fail to designate the seat, the court is entrusted with the task of determining the seat in consideration of all relevant circumstances and factors such as neutrality, legitimate intention, and interests of the parties. According to the Digest on Model Law, the seat in such scenarios is usually the effective place of arbitration, i.e. the place where most arbitration hearings were held or the place of the last oral hearing (CLOUT Case No. 374).

InDubai Islamic Bank v. Paymentech (2000) the English High Court particularly examined what circumstances would be relevant for determination of the seat in situations where the parties and the tribunal fail to designate the same. The Court held the place where all the relevant actions in the arbitration, i.e. hearings and the issuance of award took place to be the arbitral seat. The Supreme Court has previously accepted this approach in Imax Corporation v. E-City Entertainment (2017), wherein it adjudicated on the applicability of the Act in the absence of an express designation of seat by the parties. The Court explicitly noted that the place “where in fact the arbitration took place” is a “significant determinant” for the arbitral seat.

However, the Supreme Court in Hardy struck a completely different chord as it failed to appreciate that all the relevant arbitration procedures in fact took place in Kuala Lumpur, which undoubtedly made it the effective place of arbitration. It also failed to take notice of the fact that the arbitration clause in the GoI’s Model Production Sharing Contract itself uses the terms ‘venue’ and ‘seat’ interchangeably.

Therefore, the Supreme Court has taken a clear detour from the developed jurisprudence under Model Law on this issue and adopted a seemingly interventionist approach by ruling in favour of the supervisory jurisdiction of the Indian courts in a foreign award.

Conclusion

Unfortunately, the Supreme Court in Hardy has not elucidated any cogent principles to guide the determination of the seat when both the parties and the tribunal fail to do so. Instead, by adopting a semantic rather than a pragmatic approach, the Court has only added to the already incoherent line of authority interpreting the principle of implied exclusion. It has diverged from its own line of judicial authority, n as evidenced in Videocon and Roger Shashoua, which not only sought to reverse the draconian effects of Bhatia International, but also highlight the approach adopted by the Supreme Court for construction of clauses which do not designate the arbitral seat in unequivocal terms.

More importantly, the decision in Hardy brings to forefront the significant repercussions of callously drafted arbitration clauses and use of inconsistent terminology. During the negotiation of arbitration agreements, parties should not only cautiously consider the pitfalls and advantages of choosing a particular jurisdiction as the seat, but also ensure that the arbitration clause unequivocally mentions the chosen seat to avoid possible traps by the aggrieved party.

– Divpriya Chawla

[1] Jonathan Hill, Determining the Seat of an International Arbitration: Party Autonomy and the Interpretation of Arbitration Agreements, (2014) 63(3) Int’l & Comp. Law Quarterly, 517. In procedural terms, “uni-directional” clauses are those in which the parties’ agreement explicitly or impliedly points towards a single location.

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